Understanding and Identifying the Benefits of Transfer Pricing

• Identify the benefits of transfer pricing so that your company can leverage it effectively.
• Understand the principles behind transfer pricing.
• Learn more about the risks involved in transfer pricing.

Many multinational companies own other corporations (sometimes in other countries) for a variety of reasons such as tax incentives, cost-effectiveness, lower labor expenses, and other related reasons. This concept is referred to as transfer pricing.

Understanding Transfer Pricing

This concept refers to the exchange of services or goods between related companies at a certain price. These transactions occur between companies related in some way such as a parent company and its subsidiaries and/or branch offices. Some companies leverage lower tax rates in another country by increasing transfer prices for services and goods. Companies that wish to leverage transfer pricing must follow a set of guidelines that the Organization for Economic Cooperation and Development (OECD) established.

Arm’s Length Principle Definition

The OECD implements the Arm’s Length Principle. This stipulates that the transfer pricing of a parent company and its subsidiary and/or branch office should be as if they are distinct and separate companies. This principle follows an international standard for computing taxes. This standard ensures that governments collect the right taxes and companies avoid double taxation. For compliance the transactions of a parent company and its subsidiaries must be like separate companies.

Identify the Benefits of Transfer Pricing

The benefits of transfer pricing allow your company to maximize its resources. Some of these advantages include the following:

1. Companies gain tax benefits through transfer pricing. They can boost their profit margins by transferring goods and services to a subsidiary based in a country that has lower tax rates. These lower rates also allow companies to reduce their costs.
2. Transfer pricing enables companies to avoid double taxation and still comply with taxes. Following the Arm’s Length Principle prevents fraudulent transactions from taking place. It also allows authorities to identify and penalize companies that violate the law.
3. One of the benefits of transfer pricing is that it improves your resource allocation strategy. It enables your company to spread expenses across your subsidiaries and inject cash into their operations.
4. The implementation of transfer pricing improves transparency. It allows companies to establish the appropriate price for services and goods and provide authorities with the necessary documents.
5. Transfer pricing allows you to generate accurate financial reports which you can use for strategic decisions.

Risks of Transfer Pricing

The benefits of transfer pricing are obvious; however, it comes with risks that you need to be aware of. These are some of the risks involved in transfer pricing:

1. Transfer pricing between a parent company and its subsidiaries and/or branch offices takes effort and time. Disagreements can occur which can extend the process beyond established deadlines. It’s important to discuss the price of goods and/or services involved so that you create a consensus among all parties involved. The prices also need to comply with the law to avoid penalties.
2. You’ll incur extra costs in terms of work hours and personnel needed to implement the transfer prices. You might also need to invest in an accounting system to keep records accurate and to support the tasks your team needs to do.
3. Transfer pricing adheres to strict laws that require detailed paperwork. Prepare for possible audits because of the intercompany transactions you process. Your company needs to comply with the documentary requirements and laws to avoid penalties.

Knowing these risks in transfer pricing allows you to implement the necessary adjustments to simplify the process and remain tax compliant.

What Transfer Pricing Methods Can You Use?

To fully utilize the benefits of transfer pricing you need to implement certain methods. Identifying a method for your transaction allows you to establish the appropriate price for transactions.

1. Transactional Net Margin Method or TNMM – this method compares the net profit margin of a related company with the net profit margin of the competition in comparable transactions.
2. Resale Price Method or RPM – companies use this method when they purchase an item from another so that they can resell it. The transfer price is established depending on the markup of the said item’s resale price.
3. Cost Plus Method or CPM – this method involves adding a markup to the service or product while factoring in production costs.

These are just a few of the transfer pricing methods you can implement to establish a price whenever you buy or sell goods and/or services to your subsidiaries based in another country. Some companies combine the methods mentioned above whenever they create a transfer pricing strategy.

Manila Bookkeepers Transfer Pricing Services

If you need assistance with transfer pricing, choose Manila Bookkeepers as your business partner. They are an accounting firm in Makati with years of experience in the finance and accounting industry. Their transfer pricing services enable multinational companies and their local subsidiaries to establish the prices of their services or goods between countries. This approach is vital so that transactions incur fair taxes. The Manila Bookkeepers team can assist you through the different stages of the process.

The Manila Bookkeepers team can provide you with:

1. Assessment of current policies and processes that determine the pricing of transactions between a parent company and its subsidiaries. The team makes recommendations regarding possible improvements that boost efficiency and solve problems.
2. The Manila Bookkeepers team can prepare the documents and attachments you need for proper transfer pricing. They can update your pricing documentation as well so that you comply with local tax laws.
3. The team can conduct a comparability analysis wherein they evaluate and compare your transactions with others in your industry. This approach makes sure you follow regulations.
4. Manila Bookkeepers can assist in the process of preparing contracts and agreements between a parent company and its subsidiaries in the Philippines. Their team can review and draft agreements to comply with local laws.
5. Their team can assess the existing transfer systems and methods your company implements. They can assist you in choosing the appropriate transfer pricing method for the transactions you process.

Leveraging the benefits of transfer pricing and tax compliance are smoother when you partner with a local tax expert such as Manila Bookkeepers. Other than transfer pricing services, their team also provides accounting and bookkeeping services that can help your company do business in the Philippines.